Air Products and Chemicals Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 3, 2022

There are 16 speakers on the call.

Operator

Good morning, and welcome to the Air Products First Quarter Earnings Release Conference Call. Today's call is being recorded at the request of Air Products. Please note that this presentation

Speaker 1

Thank you, Ali. Good morning, everyone. Welcome to Air Products' Q1 2022 earnings results teleconference. This is Simon Moore, Vice President of Investor Relations, Corporate Relations and Sustainability. I'm pleased to be joined today by Seifi Ghasemi, our Chairman, President and CEO Doctor.

Speaker 1

Sameer Sirhan, our Chief Operating Officer Melissa Schafer, our Senior Vice President and Chief Financial Officer and Sean Major, our Executive Vice President, General Counsel and Secretary. After our comments, we will be pleased to take your questions. Our earnings release and the slides for this call are available on our website at airproducts.com. This discussion contains Forward looking statements, please refer to the forward looking statement disclosure that can be found in our earnings release and on Slide 2. In addition, throughout today's discussion, we will refer to various financial measures.

Speaker 1

Unless we specifically state otherwise when we refer to earnings per share, EBITDA, EBITDA margin, the effective tax rate and ROCE, both on a company wide and segment basis, we are referring to our adjusted non GAAP financial measures, Adjusted earnings per share, adjusted EBITDA, adjusted EBITDA margin, adjusted effective Tax rate and adjusted return on capital employed. Reconciliations of these measures to our most directly comparable GAAP financial measures be found on our website in the relevant earnings release section. Also, as we shared with you on our last call, this is the Q1 we reported our results with our new Middle East and India and our new corporate segments. Now, I'm pleased to turn the call over to Seifi.

Speaker 2

Thank you, Simon, and good day to everyone. Thank you for taking time from your very busy schedule To be on our call today. I am proud to say that despite significant challenges, Including unprecedented energy cost increases, and I mean unprecedented, Especially in Europe, supply chain disruptions and the continued adverse effects Caused by the pandemic, the talented, committed and motivated people of Air Products Continue to deliver excellent results, including earnings per share this quarter in the top half of our guidance range. This quarter, we closed on Phase 1 of the Jazan project, which is the single largest project in our company's history and will create significant value for many years to come.

Speaker 3

As always,

Speaker 2

I want to thank our more than 20,000 employees around the globe We're standing together, working hard, staying agile and delivering for our customers and shareholders. Let me start this presentation with our highest priority, which is obviously safety. Please take a look at the Slide number 3. Although we have made significant progress in this area since Fiscal year 2014, our first quarter safety performance was slightly behind last year. That is not acceptable.

Speaker 2

Our goal remains 0 accidents and 0 incidents, and we are committed To drive toward that goal across the organization, Knowing that the right attitude and constant attention to safety is absolutely necessary philosophy and our 5 point plan. We have shared these slides with you before, So I'm not going to go through the details, but these are the principles that we follow every day And they will guide us in the future. Now please turn to Slide 7. We are focused on making Air Products a leader in providing solution To today's significant energy and environmental challenges, through gasification, Carbon capture and clean hydrogen. I am proud to say that we have continued To create and win projects that help customers and countries meet Their growing needs for cleaner energy and environmental solution.

Speaker 2

Last year, we announced 2 landmark blue hydrogen projects, 1 in Alberta, Canada and the other in Louisiana, United States of America. Adding to our slate of world scale megaprojects supporting the energy transition. At the beginning of our fiscal year, this fiscal year, we successfully closed On Phase 1 of the $12,000,000,000 Jazan gasification and power project, fulfilling one of our major commitments, We continue to expect Phase 1 of this project to contribute $0.80 to $0.85 per share On a full year basis, consistent with what we have committed to you before, we also continue to make great progress On this our significant project backlog. Now please turn to Slide number 8. Creating a cleaner future requires experience, investment and innovation on a world scale.

Speaker 2

At Air Products, we have the technology, the track record, the capital And the ambition to execute our Board strategy. In bringing people around the Board together To collaborate in an inclusive environment and helps solve sustainability challenges, We are living our higher purpose as a company. That is our higher purpose. Now please turn to Slide 9. It is clear that at Air Products, Sustainability is our growth strategy.

Speaker 2

Sustainability creates our broad opportunities And our growth opportunities support our sustainability goals and focus. We are very proud To help drive the energy transition, in particular, through our world scale hydrogen megawatt projects. Our Nuon project in Saudi Arabia, our Beta project in Canada and Louisiana project in United States of America Represent almost $10,000,000,000 of Direct Air Products capital To create the 0 and low carbon hydrogen needed to drive decarbonization and accelerate the energy transition. These projects will significantly reduce CO2 equivalent emissions for our customers, For Air Products itself and for the world, as a first mover taking real action Through these real projects, we can bring a portfolio of experiences and technologies together To provide lower carbon forms of energy, improve our customer sustainability And help solve significant energy and environmental challenges. As I said, this is our highest purpose as a company.

Speaker 2

In addition, it is important that our commitments are aligned with our strategy. We introduced our 3rd by 30 carbon intensity reduction goal more than a year ago. And I'm very proud to say that the major projects we have announced along with our day to day focus on operational efficiency Puts us in a great position to meet or exceed this goal by 2,030. But as a company, we are never satisfied with our current performance. Therefore, we are taking another look At our opportunities to make even more meaningful progress toward higher environmental goal.

Speaker 2

Under the purview of our Sustainability Leadership Council, we are reviewing additional areas of opportunity, Which could include a Scope 3 emissions goal, the benefits of avoided emissions and or other potential scenarios. I expect to share more with you on this exciting topics by mid year. Now please turn to Slide 10, It shows our EPS growth. While we focus on our strong long term prospects, We remain vigilant and motivated to deliver excellent near term results consistent with our strategy And what we have already promised to investors. As you can see, we have delivered On what we promised you in 2014 and achieved an 11% annual cumulative EPS growth on average since 2014, while building a strong foundation for our future growth.

Speaker 2

The excellent results and key projects we have executed represent the initial stages of our strategy To advance the world toward the cleaner energy future, I am very optimistic about our company's prospect To capitalize on these growing opportunities by being a meaningful payer in the energy transition. Now please turn to Slide number 11. As a reminder, we do share Our earning growth directly with our customers through our dividend, while we continue to invest in growth opportunities. The whole team at Airtel Products is very proud that we just announced our 40th Consecutive year of dividend increase. This tremendous long term record is a testament to our People and our strength and consistency of our business model.

Speaker 2

The most recent increase is 8%, Which increases our dividend to $1.62 per share per quarter, We expect to translate to directly returning more than 1.4 $1,000,000,000 to our shareholders in 2022. And as Minister Schafer, Our Senior Vice President and Chief Financial Officer will share with you in a moment We have significant remaining cash flow to support our many project opportunities. And finally, please turn to Slide number 12. Still my favorite slide Since it captures in one chart the progression of our business since 2014, We continue to deliver strong underlying results, but our margin declined in recent quarters, primarily driven 2 third of the margin decline from our peak is due to the impact of this higher energy pass through. But as I indicated last quarter, we are continuing to take action to improve our margins Through controlling costs and increasing prices to cover cost increases.

Speaker 2

Now I'm happy to turn the call over to Melissa

Speaker 4

Before we discuss the details of our Q1 results, I would like to highlight a few notable items in our reported financials this quarter. As we previously announced, we reorganized our reporting segments starting this quarter. To provide more visibility to our regions, we separated which includes the new Jazan joint venture in India. Additionally, we combined Global Gases with the Corporate and Other segment. The historical resegment financial information is available in a Form 8 ks, which we published in December.

Speaker 4

We are proud to have completed Phase 1 of the $12,000,000,000 Jazan joint venture in late October. This has led to 2 separate but related events, which impact our results favorably this quarter. 1st With the start of the new joint venture known as JIGPC's ongoing financial contribution, consistent with the contract between the joint venture and Saudi Aramco. On an ongoing basis, our portion of the Jazan joint venture's net profit is included In equity affiliate income, since we don't consolidate this joint venture. We also recognize interest To be clear, these are loans from Air Products to the joint venture and are a mechanism for us to efficiently fund our contribution.

Speaker 4

Together, these two income streams drive $0.80 to $0.85 of annual Phase 1 EPS, exactly What we expected and committed to our shareholders and consistent with what we recognized for 2 months in Q1. Of approximately $0.20 involve the transfer of the air separation units supporting the gasifiers at Jazan from our previous ASU joint venture to the Jazan joint venture. This transfer required the final settlement of our ASU joint venture, That was deferred when Air Products sold the ASUs to the joint venture. This profit was recognized as equity affiliate income. Partially offsetting this and also an equity affiliate income recorded a loss associated with the ASU joint venture settlement.

Speaker 4

Our joint venture partners share of this settlement loss is reflected as a favorable non controlling interest item. Percent to nearly $3,000,000,000 Volume and price were strong and together account for 13% of the Increase, while the remaining half was driven by higher energy pass through. Rapidly escalating energy costs continue to negatively impact our business across the regions this quarter. The situation was especially challenging in Europe and Americas as natural gas and electricity costs surged even higher 6 times higher and power costs are almost 4 times higher than the beginning of the year. Our on-site business, about Half of our total company sales has contractual protection from the energy cost increases.

Speaker 4

The costs are passed on to the customer. The energy cost pass through drove sales 14% higher, but did not impact our profits. In our merchant business, our teams around the world We were able to recognize a 10% price increase across the merchant business, which translated to a 5% increase All our teams for the excellent work they have done in response to such a significant challenge. However, we still have more work to do. We are actively executing against price actions across the regions to recover the unprecedented cost impacts.

Speaker 4

Volume improved 8%, up in all segments, driven by new assets, hydrogen and merchant recovery and Stronger sale of equipment activities. EBITDA increased 8%, again exceeding the $1,000,000,000 mark for a quarter As favorable volumes, prices and equity affiliate income more than offset higher costs. EBITDA margin declined 5.70 basis points, mostly due to the higher energy pass through, which negatively impacted our margins about 4 50 basis points, while higher cost, net of price increases contribute to the remaining shortfall. Sequentially, volumes were down 3%, primarily due to the strong sale of equipment in prior quarter. The 2% price increase was the direct result of our ongoing price action.

Speaker 4

EBITDA was 4% lower sequentially As better price and equity affiliate income were more than offset by higher costs and lower sale of equipment profit recognition. ROCE was 10.3%. We currently have significant cash on our balance sheet, which will We expect ROCE to improve as we deploy the cash and bring projects on stream. Now please turn to Slide 15. Our first quarter adjusted EPS was 2 point $2 which is $0.40 or 19% above last year.

Speaker 4

Volume was favorable 0 point 19 dollars And price, net of variable cost was modestly unfavorable $0.04 as our price actions were able to offset most of the unprecedented energy cost For the quarter, our price actions alone before netting against variable costs contributed about $0.40 Costs were up this quarter. Similar to prior quarters, our growth strategy has us continuing to invest in additional resources. As we incurred higher operating and distribution costs to keep our customers supplied. We had additional discretionary compensation this quarter and a positive settlement of a supply contract last year, neither of which will continue in the future. The ongoing EPS contribution of the Jazan joint venture this quarter represents 2 months and is consistent with our commitment adding The deferred profit recognition and the unfavorable ASU joint venture settlement, which I mentioned earlier.

Speaker 4

Non controlling interest was $0.07 favorable versus prior year, representing our partners portion of the ASU joint venture settlement. Non operating income was flat as the interest income from the shareholder loan associated with the Jazan joint venture was than last year, including the favorable impacts of Jazan. It is seasonally lower primarily due to the additional share based Now please turn to Slide 16. The stability of our business continues to allow us to generate strong cash flow despite the challenging Energy environment. Over the last 12 months, we generated about $2,800,000,000 of distributable cash flow or about 12.50 Note that our maintenance capital is a little higher than usual, driven in part by the spending on our new global headquarters, Which is now essentially complete.

Speaker 4

From the distributable cash flow, we paid over 45% or 1 $3,000,000,000 as dividends to our shareholders and still have about $1,500,000,000 available for high return projects. This strong cash flow, even in uncertain times, enables us to continue to create shareholder value through increasing dividends and in cash on hand and an increase in capital RA spent. As you can see, our deployment potential is over 33,000,000,000 available today. Over $16,000,000,000 we expect to be available by 2027 and over $9,000,000,000 already spent. We still believe this capacity is conservative given the potential for additional EBITDA growth, which generates additional cash flow And additional borrowing capacity.

Speaker 4

We will continue to focus on managing our debt balance to maintain our current targeted AA2 rating. So you can see, we've already spent 27% and have already committed 70% of the updated capacity we show here. Now to begin the review of our business segment results, I'll turn the call back over to Seifi. Seifi?

Speaker 2

Thank you, Melissa. Now please turn to Slide number 18 for our Asia results. Sales were up 9% compared to last year. Volumes grew 4% due to a Strong on-site volume as a variety of small to medium sized new plants came On the stream across the region. El Yuan facility continues to operate at full capacity under the interim supply agreement.

Speaker 2

We continue to recognize the reduced fee in quarter 1 consistent with this interim supply agreement. We expect this We saw the best price performance for Asia in nearly 2 years. The 3% overall price Our team has implemented price action in response to higher power costs and general inflation. China's government has also relaxed its power 30 program to allow Low car power costs to fluctuate. This market oriented approach May result in more variability in our power cost going forward.

Speaker 2

We are monitoring this situation very closely. In addition, China's effort to reduce energy usage and intensity through its dual control policy Continued to impact customer demand and caused isolated disruptions of our plants. This had a very modest negative impact on our plant efficiency and supply chain costs. This impact was more prominent earlier in the quarter and seemed to ease in December. Costs were also unfavorable due to resources that we needed to add to support our new This project starts ups in the region and were higher without the COVID related government And currencies more than offset higher costs.

Speaker 2

Sequentially, sales and profits were up As strong price more than offset higher costs. Now I would like to turn the call over to Simon to talk about our European results. Simon?

Speaker 1

Thank you, Seifi. Now please turn to Slide 19. Before I get into our Europe results And to build on Melissa's comments earlier, I wanted to share some details related to the unprecedented energy cost increases I also would like to thank our European team for their extraordinary efforts. Although we are very proud of the work done by our team, Our price actions have not fully recovered the cost increase. And as Melissa said, we have more work to do.

Speaker 1

We do believe we will be able to recover this shortfall by the end of the Now please turn to Slide 20 for a review of our Europe results. Sales increased 37% versus Last year, volume and price were strong and together grew 14%. However, our profit and margin weren't favorable this quarter due to the dramatic energy cost The energy cost pass through increased sales 27%, but did not increase profit. For the quarter, our price actions resulted in a 9% price gain for the region, which corresponds to a 14% improvement for the merchant business. Prices were higher across all major product lines and sub regions.

Speaker 1

Volume increased 5%, primarily driven by improved hydrogen and merchant Currencies were unfavorable 4%, primarily due to the weaker euro against the U. S. Dollar. For this quarter, other costs also increased. The very significant energy cost increases also disrupted our supply Negatively impacting both plant operating and distribution efficiencies.

Speaker 1

We also saw inflation, higher maintenance, Discretionary incentive compensation and COVID related costs, while we continue to invest in additional resources needed to support our growth strategy. EBITDA was down 19% as higher costs were partially offset by price increases. Volume was positive in sales, but did not contribute significantly profit due to unfavorable mix. EBITDA margin was 1500 basis points lower, about 700 basis points of the decline due to the significant energy cost pass through increase, while the remainder was mostly due to higher costs, partially offset by price in the merchant business. Compared to prior quarter, EBITDA was 19% lower due to unfavorable business mix, higher costs and lower equity affiliate income.

Speaker 1

Higher Energy pass through also negatively impacted margin by about 3 50 basis points sequentially. Now, I would like to the call over to Doctor. Serhant for a brief discussion of our other segments.

Speaker 5

Thank you, Simon. Now please turn to Slide 21 Volume and price together were up 11%, while energy cost pass through accounted for the remaining increase. Volume grew 8%, primarily due to hydrogen recovery and strong merchant demand. Although our hydrogen business has improved, it has not yet fully returned to its pre COVID levels. Similar to other regions, Americas also experienced significant energy cost increases versus last year.

Speaker 5

Our team has done an excellent job raising prices to cover the energy cost increase in this quarter. The 3% gain for the region is equivalent to 9%, 9% on our merchant business. Costs were favorable despite inflation and supply chain related challenges, In part due to lower maintenance costs this quarter, we expect planned maintenance activities to back up next quarter. EBITDA posted another double digit gain, 14% ahead of last year. As better volume, price and equity affiliate income more than offset the higher energy costs.

Speaker 5

EBITDA margin was 5.60 basis points lower than last year. Higher energy cost pass through negatively impacted EBITDA margin by about 700 basis points. In other words, EBITDA margin would have been up excluding the energy cost pass through. Sequentially, EBITDA was lower due to higher maintenance costs. I have energy cost pass through negatively impacted EBITDA margin by about 300 basis points.

Speaker 5

Now please turn to Slide 22, our newly created Middle East and India segment. Again, as I stated before, this segment is composed of our businesses in the Middle East, including the Jazan joint venture and our business in India. Sales and operating income in this segment are modest since our Middle East and India wholly owned operations Our smaller in size. However, the segment's EBITDA is significant since it includes the equity affiliate income Related to the Jazan joint venture and our India joint venture. Roughly $70,000,000 increase in equity income included our share of the Jazan joint venture net profit for 2 months And the net impact due to the finalization of the ASU joint venture that Melissa previously discussed.

Speaker 5

Sales and operating income are up compared to last year due to a new facility on stream in India, but are down sequentially to a favorable Due to a favorable contract settlement in the previous quarter. Now please turn to Slide 23, Which addresses our new corporate segment, which now includes our previous global gases segment. This segment includes our sale of equipment businesses as well as Our centrally managed functions and corporate costs. Over the past few years, our non LNG sale of equipment businesses Has grown considerably and are now contributing most of the sales in this segment. However, the margins of these businesses are typically below Our company average.

Speaker 5

Sales were higher in this quarter driven by increased project activities, But the profits were lower due to higher corporate costs and without last year's settlement of a supply counter. At this point, I would like to return the call back over to Seifi to provide his closing comments. Seifi?

Speaker 2

Thank you very much, Doctor. Serhan. During my nearly 5 decades in business, I have learned that the world changes all the time, sometimes in very unpredictable ways As we have seen in the past several years, therefore, for an organization, The ability to anticipate, plan and react to change with speed and resiliency It's key to success. I have also learned that all challenges can be addressed by staying focused And United and CALM and by working towards a common goal. That is why I'm proud That despite the continuing adverse effects of the pandemic, rising costs, Inflation, supply chain disruptions and all of the challenges facing us, Our people at Air Products have done just what we expected them to do.

Speaker 2

That is They have adopted to the change and are acting accordingly. This is why we delivered strong results Despite all of these challenges, our volume, price and profits all grew this quarter versus last year, Even as we stayed the course and added resources to support our opportunities Has become even stronger in the past 2 years and fully expect to deliver significant earnings growth As the economies around the world normalize and our new projects come on stream. Our strategy and our execution. However, I do have some concerns On the economic backdrop, driven by continued COVID challenge, The impact of supply chain constraints, inflation, energy costs and geopolitical tensions. Therefore, for quarter 2 of fiscal year 2022, our earnings per share guidance It's $2.30 to $2.40 up $0.11 to $0.15 over last year.

Speaker 2

For fiscal year 2022, our earnings per share guidance remains unchanged At $10.20 to $10.40 which is 13% to 15% better than last year. We continue to see our capital expenditure in 2022 to be around $4,500,000,000 to $5,000,000,000 Including the approximately $1,500,000,000 for Phase 1 of the Jazan project. Now please turn to Slide number 25. The opportunities created by the energy transition are immense. At this point, through our mega projects in gasification, carbon capture and hydrogen, We are acting as a first mover.

Speaker 2

We are taking real action through real boarder scale investments In projects that address significant energy and environmental challenges, we have the portfolio of and technologies that we can bring together in an optimal configuration for a project. Working with customers and countries around the world, we will deliver low carbon forms of energy and improve their sustainability. In addition to investment and technology, we know that as always, The real enablers of this transition are the people who work alongside our customers And bring our opportunities and projects to life. At Air Products, we have Consciously increase our talent and resources to take on these urgent challenges, adding Over 3,000 people over the past 2 years. As we drive toward a clean Energy Board, we need talented people to help us accelerate the progress.

Speaker 2

We are continuing to build a diverse and inclusive culture where our people feel they belong And note that their contribution matters. As I always say, our long term competitive advantage It's the commitment and motivation of our people. I know that through their hard work

Operator

And we'll go ahead and take our first question from P. J. Habakkuk with Citi. Please go ahead. J.

Speaker 6

Hynes:] Yes. Good morning, Seifi And the team.

Speaker 2

Good morning, P. J. How are you this morning?

Speaker 7

Yes, a

Speaker 6

couple of questions. First, can you give us an update on the Neom project, Especially on the downstream side, where you will be executing on your own, is there any update on contract signings? And then, the significant disruption that we are seeing in energy pricing in Europe, does that create uncertainty for customers to Commit to long term contracts on that side?

Speaker 2

Well, TJ, thank you for the question. The new project With respect to the downstream side, obviously, we are working in developing the infrastructure needed to bring in the green ammonia Crack it and then sell it to our customers. So those projects are under way. In terms of any contract Signing and all of that, we have said from the beginning 2 years ago that we are going to be very Cautious about saying anything about that because that is an issue of competitive advantage, and we Certainly, don't want to give all of our secrets away. With respect to the question that you asked about energy costs, Obviously, the significant fluctuation in energy costs and especially them going up It's going to make it more competitive for the green and green products.

Speaker 2

So from that point of view, the level of interest in green hydrogen and blue hydrogen Has significantly increased around the world.

Speaker 6

Okay. That's fair enough. And a quick question for Melissa. On Slide 13, you mentioned interest income from loans to Jazan. Can you just give us more details on that loan?

Speaker 6

Thank you.

Speaker 4

Yes, absolutely.

Speaker 2

And Melissa will address that, but that's a very, very complicated transaction. And I'm not sure she can she will be able to answer all of your details of your question on the call. We can always have another call with you I'm sorry to give you the details, but I'll turn it over to Melissa to say what she can on this call. Go ahead, Melissa.

Speaker 4

Yes. Thank you very much, Stacy. Thank you, PJ, for the question. So as Stacy mentioned, it is complex, but Just a quick highlight. So as we mentioned during our statements, about 1 third of the contribution from the JIGPC So this is just our efficient way of funding the joint venture.

Speaker 6

Thank you.

Speaker 2

Okay, TJ. Yes. Thank you, Seifi. Sure.

Operator

We'll go ahead and move on to our next question from Steve Byrne with Bank of America. Please go ahead.

Speaker 8

Yes. Thank you. Simon, you made a comment about in the European segment, you expect to recover costs With price actions by year end, just wanted to drill into that a little more. Can you comment on What fraction of your merchant business has this pass through in it? Perhaps it's small, but do you have it in place in some?

Speaker 8

But In order for you to recover it by year end, are you do you have more price actions that you have yet to announce? Or is there a lag effect?

Speaker 9

Where do

Speaker 8

you expect cost to come down? Just would like to better understand that.

Speaker 2

Sure. It's actually pretty Straightforward. What happens is that we anticipate energy cost increases and we announced price increases. But energy prices have been going up significantly higher than our anticipation. Therefore, we need to take a delayed action To increase prices to recover what has happened in the past.

Speaker 2

That is why there will be a delay in recovering the cost. We will take the action. But obviously, from the time we take the action and invoice the customer until we get the Money and all of that, there is a delayed action. But fundamentally, we can't increase prices every day. We do that every quarter.

Speaker 2

And what we anticipated for the Q1 of this year was significantly lower than what actually happened. So now we have increased prices starting January 1, and we will increase prices starting April 1, And as we go with different customers, and that is why there is a lag.

Speaker 8

And any up on how the pass through in the contract?

Speaker 2

Well, with Medtronic business, A lot of it is not per contract. The pass through, which is per contract, is for our on-site business. That is pass through. That hasn't affected our results, and all of those pass throughs have happened. That is why our results on our on sites are very good.

Speaker 2

On the merchant side, which in Europe is approximately 60% of our business, that is where We execute the price increases. And over there, most of the contracts do not have kind of official pass it's a merchant business. Yes.

Speaker 8

Okay. And one more for you, Seifi.

Speaker 2

It seems like

Speaker 8

Your focus and goals on energy has kind of Expanded to beyond hydrogen to include carbon capture now. My question for you is, do you see this as a business Development for products that could be completely independent of hydrogen, I. E, Working with customers to perhaps capture carbon from combustion sources, that's a completely different approach and Perhaps that could drive increased sales of oxygen. Just where would you like to see that particular business go for Air Products?

Speaker 2

That is an excellent question. At this point in time, we are doing carbon capture in order to produce Green I mean, blue hydrogen specifically. So I don't see us branching into that. But if that becomes a very attractive sector and we have the technology. We take a look at it.

Speaker 2

But right now, we are doing carbon capture those projects in conjunction With producing blue hydrogen. Okay. Thank you. Thank you, sir.

Operator

And we'll move on to our next question from Jeff Zekauskas with JPMorgan. Please go ahead.

Speaker 10

Hi, thanks very much. You earned $2.52 in the quarter. And so if you annualize that, That's $10.10 and your guidance is $10.20 to $10.40 and the December quarter is probably a seasonally weak Quarter. So it doesn't seem like you expect very much progress or maybe you're really at the Top of your range or a little bit beyond that, why aren't your earnings higher this year? Energy costs are coming down in Europe.

Speaker 10

You're passing through prices. Shouldn't you have higher returns this year?

Speaker 2

Jeff, the thing is that Everything obviously depends on your view of the world and in terms of what will happen. Look at this quarter, we had high expectations for this Quarter, but then COVID came in and Europe got shut down and energy prices went up significantly higher. I am not shy to say that I am very concerned about some of the geopolitical tensions, What would be the implications of that for energy prices? Heavens forbid if anything happens with Ukraine and so on, but will that due to Europe Energy? So as a result, we are trying to be balanced and Give people projections that we realistically believe we can meet.

Speaker 2

Now you can say we are conservative, but we might not But we didn't see any reason at this point in time considering what has happened in the Q1 To change our guidance. Now if next quarter things change, we will obviously share any thoughts that we have with you.

Speaker 10

Great. And then secondly, I'm always puzzled about your corporate EBITDA line. Can you give us any insight into what That number might be over the next three quarters. Does it change much? Is there a certain level?

Speaker 10

And then for Melissa, the undistributed earnings of equity method investments in the quarter We're negative 117. What should that number be for the year, order of magnitude?

Speaker 2

Okay, Jeff. I'll answer your first question and Melissa will answer your second question. The thing is that, that corporate sector, obviously, from my point of view, I'd like to see The number to be basically on EBITDA thing to be balanced, that means that we make enough money on the other parts of the business In order to balance our corporate overhead, that's our goal. But obviously, because it is Just flat, basically. If you don't make money, we don't lose money.

Speaker 2

So with respect to your second question, Melissa, would you like to address that, please?

Speaker 4

Yes. Thank you, Seifi. Jeff, I think you're referring To the undistributed earnings of equity affiliates and the cash flow statement. Yes,

Speaker 1

exactly right.

Speaker 4

Yes, thank you. So this is from the joint venture. So as the dividends are distributed later this year, which we fully expect, they'll go through the investment section.

Operator

We'll move on to our next question from John Mignolte with BMO Capital Markets. Please go ahead.

Speaker 9

Good morning. Thanks for taking my question, Seifi. Just a question on the European Energy issues. So it sounds like if I'm understanding and I guess that's what I want to clear up, what you're putting through, it's not a surcharge or anything like that. It's more of a direct pricing.

Speaker 9

So if we start to see Energy prices subside as we get past kind of the winter months, etcetera. It sounds like that would be a reasonable windfall for you as Pricing is going through as the energy is coming down. Am I thinking about that right? Or is there some other nuance to consider?

Speaker 2

First of all, good morning, John. Hope all is with you and I'll talk to you for 1. With respect to the question that you're asking, You always get it right. That is exactly what we are trying to do. That means that we are increasing the prices.

Speaker 2

And then hopefully, as energy cost goes down, we expect to keep some of those prices because To make up for the fact that we didn't get enough of it in the previous quarters. So you're right, if energy prices go down, If they go down, then we will have an upside. But that's a big if, John. But that is exactly right. You have it you are thinking about it exactly The way we are trying to execute.

Speaker 9

Got it. Okay. And then just a question on the 3rd by 30 Carbon intensity goal that you have, I guess when you think about the 3 big hydrogen projects, the 2 big blue ones and the green one, Does that actually get you to that target already or is there more to do there? And I guess tied to that, Are there projects going forward that Air Products might not do just because of the carbon intensity around them That in the past they might have. So say whatever it's a big coal gasification project where there's no carbon capture or something like that.

Speaker 9

Does that Does a target like this preclude you from actually going after that type of business? I guess, how should we be thinking about that?

Speaker 2

Well, John, that is an excellent question. First of all, in my comments, you're very smart, you read through it. I was saying that look at the projects that we are doing, We think we can meet that target and exceed it, and therefore, we are going to give you an update by mid year. So you're right. I mean, we are doing a lot of good projects and that would help us.

Speaker 2

With respect to your second question, It depends on how the contracts are structured, John, because countries will come to us, Have come to us and said, I want you to do this project. It's called gasification, and You are not responsible for the CO2. I give you the raw material and you give me the product, you adjust the total and the CO2 is my responsibility. If people are willing to do it like that as they have been, then we do the project because then we are not Adding any CO2 to the war, somebody else is doing that. You should know what I mean?

Speaker 2

But if it turns out that we are doing a project where The CO2 is our responsibility. Then we would think twice about doing anything. Sure. Because we are about reducing CO2 in the world, not adding to it. But there are The customers, the country comes to us and said, look, I want to take the coal and make methanol out of it, And I'll take the responsibility for the CO2.

Speaker 2

Okay, John?

Speaker 9

Got it. Very helpful. Thanks very much, Davey.

Speaker 2

Thank you.

Operator

We'll go ahead and move on to our next question from Chris Parkinson with Mizuho Securities. Please go ahead. Chris, your line is open.

Speaker 11

Sorry about that. I was

Speaker 12

on mute. Can you just give us a bit of a broader view in the situation of China, Luan, as well as some just very quick updates on Jutai and Dibang. How should investors be thinking about the cadence of these projects? Thank you very much.

Speaker 2

Good morning, Chris. But the thing is that I gave you an update on Luen that the project is the plant is operating at full scale and all of that. And we I've consciously given a break for the to the customer for 2 years for a lot of good reasons, and now we expect that to be going back At the October of 2022. The other projects are being executed On plan, we don't expect any major issues with those. So up to now, we are We don't have any significant disruption that we need to talk about.

Speaker 9

Got it. Thank you.

Speaker 2

Thank you.

Speaker 12

Yes. No, that's very helpful. And just as a very quick follow-up, prior to COVID, there was a lot of talk and obviously there were some projects signed Across Central and Southeast Asia, it seems like you still have a very large opportunity in Indonesia and there's still several projects being decided on In India, could you just give us a very quick update on your overall thought process and how those would potentially fit in to the ABD's backlog?

Speaker 2

Thank you. Well, we have decided not to talk about those projects, and there are a lot of them, as you alluded to, until we sign a final contract, so we don't want to announce MOUs or we don't want to announce every time that I have a video conference with a minister or anything like that. So those Opportunities are there and when those contracts get to the stage that they are definitive contracts, Then we will obviously announce them, but those projects are there. We haven't seen any slowdown.

Speaker 11

Thank you.

Speaker 2

But they are delayed because of COVID in terms of getting to the final stage of the contract. But I expect that they

Speaker 12

Understandable. Thank you so much.

Speaker 2

Thank you, Chris.

Operator

We'll take our next question with David Begleiter with Deutsche Bank. Please go ahead.

Speaker 9

Thank you and good morning.

Speaker 2

Hey, David. How are you? I'm doing well, sir. How about yourself? Vega, Vega.

Speaker 13

Yes, sir. Question Europe, you mentioned the delays in implementing or capturing the pricing this time around. Why is that the case? Is that because of the rise in energy prices, and are you seeing similar cadences by competitors in delaying or extending captures until The end of the year.

Speaker 2

David, I'm very glad that you asked the question. When we say the delay, please, it is not as if we are delayed in the group housing cases. We are falling Let's say, here is the month of end of April, right? And our team gets together and say, we anticipate that prices in June, July In August, the price of energy will go up 10%. Therefore, we announced a 10% increase On prices on June 1, right?

Speaker 2

If the price during that quarter of June, July August goes up 20%, Then we have fallen behind. Then in the month the next quarter, now we need to raise the prices 30% to catch up with that. But then the energy prices so what our issue in Europe has been that every time we anticipate price increases, The actual price increases goes way beyond that. There was no way that we would have predicted, no way that Natural gas prices in Europe will go up 6 times. There was no way that we would have predicted that electricity cost in Europe will get $0.20 a kilowatt.

Speaker 2

So that is the delay. It is not as if you are delayed in action. It is the fact that our anticipation of price increases were lower because we thought it was pretty robust, But the real world got ahead of us. That is why we are lagging behind. We think that we will see a significant improvement in the Performance of our business in Europe in the quarter we are in.

Speaker 2

I fully expect that, but Who knows what happens with the energy prices? That is our inability. That is where we are falling short In terms of ability to predict energy prices, but nobody could do that because they have been so unprecedented That if at the beginning of last year, you would have told somebody that electricity costs for air products will go from If you would say $100 to $0.20 we would have thought that was unreasonable, But that's the way it has worked out. I hope I made myself clear that David, rather than doing a lot of talking. No, Very clear.

Speaker 13

And just for Melissa on Jazan. Melissa, what was the net impact of the transfer of the ASU assets this quarter, the net impact.

Speaker 4

So the net impact was about $0.20

Speaker 2

Thank you.

Operator

And we'll take our next question from Kevin McCarthy with Vertical Research Partners, please go ahead.

Speaker 7

Good morning. On Slide 15, you provide a helpful disaggregation of the EPS growth. And as I read it, it looks as though you're recovering the vast majority of the energy cost increases In terms of the $0.04 drag from price net of variable, then below that there's a $0.21 headwind from other costs. Can you speak to what Costs are resident in that $0.21 number and how you would expect that To trends over time?

Speaker 2

Hi, Kevin. Very good question. The thing is that There is a list of about 30 items in there, and we can go through that with you offline in terms of some of that. Some of that Has got to do with the fact that we had some one off benefits last year. So when you compare this year to last year, those numbers look even look as if Are higher because of all of the money that we are spending in the development of projects that the mega projects.

Speaker 2

I mean, each one of these projects takes $5,000,000 $10,000,000 to develop. As I said before, we have added 3,000 people to our organization in order to deal with that. Now as some of these projects become Investment projects and approved by our Board, then some of these costs will go into capital rather than just being charged to the bottom line. But while life is going on, they are charged to the bottom line. They are ongoing costs.

Speaker 2

So I don't expect Of course, because of what you are doing with the mega projects.

Speaker 7

I see. That's very helpful. And secondly, you raised your dividends by 8% yesterday. If I look at the EPS guidance, That would suggest potential for growth of 14% at the midpoint. Can you speak to the delta Between those numbers, what is the thinking behind adopting a more measured pace for the dividend relative to What you contemplate for earnings?

Speaker 2

Well, again, thank you for the question, Kevin. We thought 8% is pretty robust. You're saying that your dividend is not growing as much as your EPS, But we obviously want to have some cash for growth. But there is another measure that we have talked about. This is not how we decide on dividend.

Speaker 2

We have a lot of factors into that. But overall, We have always said that we want the dividend to be something between 2% to 2.5% of the stock price in terms of our dividend yield. So if you take $1.62 times 4 and divide it by the stock price, we are at around, what, 2.3%, 2.4%. So that's another measure. But as I said, that's not the only day that we decide on EPS.

Speaker 2

There's a lot of factors in terms cash flow and all of that. But that's and beside that, we are way ahead of everybody else in our sector in terms of dividend. So we didn't want to overdo it, Ken.

Speaker 7

Yes. Thank you for that reminder.

Speaker 2

Thank you, sir.

Operator

And our next question comes from John Roberts with UBS. Please go ahead.

Speaker 9

Thank you, Sefi. Good morning. You mentioned your power costs in China might fluctuate more. Are the merchant contracts in China Any different than your merchant contracts in Europe and elsewhere that you might have a harder time dealing with those fluctuations?

Speaker 2

I don't think so, John. I mean, at the end of the day, this is all a function of the competitive environment and the utilization of your facilities. In China, right now, our utilization of our merchant facilities is at in mid-80s. So at mid-80s, if the power costs go up, I think we will have the ability to pass that through.

Speaker 8

I think

Speaker 9

it was mentioned that pension costs actually went up. It was a bit of a contributor to the headwind. It's going down for a lot of other companies because of interest rates going up And good plan performance last year. Why would your pension be going up?

Speaker 2

Well, There is a lot of reason because we have a lot more people. We have 3,000 more people that we need to people say that, okay, you need Provide for these people and so on. But we don't have too many defined pension plans. But I'd like to see if Melissa Anything else to add to that? This is a function of actuaries doing all the numbers, how long people are going to live and all of that.

Speaker 2

You know all of that. But Melissa, do you have anything else to add?

Speaker 4

Yes. Thank you, Stacy. Because of where we are in our funding, we are going through

Operator

And we'll take our next question from Mike Simpson with Wells Fargo. Please go ahead.

Speaker 11

Hey, good morning. Nice quarter. Thank you. I guess given High energy costs, electricity costs and industrial gases tend to be used as sort of an efficiency aid for a lot of facilities. Is this environment good for the fundamental demand for industrial gases over the next couple of years?

Speaker 11

I mean, will it sort of spark more Bigger mini projects or just general demand for oxygen, nitrogen, etcetera?

Speaker 2

Well, for that to materialize, we need to get COVID to go away so that the economic activity goes up. And then Usually, inflationary environment is a good thing for industrial gases, usually, But not always. But we think that if the inflationary environment continues And we are able to increase prices and then if the cycle turns and we keep some of those price increases that might be a positive. It's very difficult to quantify that right now.

Speaker 11

Got it. And a quick follow-up in Europe. EBITDA was down about $40,000,000 Is that the delta that you need to just offset with pricing over the next couple of quarters?

Operator

And our next question comes from Mike Harrison with Seifi Research Partners. Please go ahead.

Speaker 3

Hi, good morning.

Speaker 2

Good morning, Mike. Seifi, I was wondering if you can give a

Speaker 3

little bit more color on the impact of dual control in China On your Asia volumes, as well as the margin impact, you mentioned some plant efficiency and supply chain was also impacted. And then it sounds like maybe the dual control policy is evolving. You said you're watching it closely. So do you expect a similar Impact in Q2 or maybe not as bad?

Speaker 2

Mike, In my comments, I tried to shed some light into that by saying that first of all, the impact, there was an impact, but it was not material In the Q1. The impact was A lot more in the month of October than it turned out to be in the month of November December. And It seems that the harshness with which the government was trying to implement that thing back in September, October Has subsided a little bit. And as a result, we don't expect any material effect of that on all Results in the next quarter.

Speaker 3

All right. And then in terms of the inflationary environment, As you look at some of your committed projects and the capital associated with them, are you seeing higher costs for labor and equipment, Steel, other materials increase the capital costs associated with those projects and do those higher costs then get passed on to the customer Through some change in the base facility charge? Or do they end up eating into returns if your capital costs are higher?

Speaker 2

So first of all, when we did some of these projects, we obviously have made provisions for possible inflation and all of that. But at the end of the day, it is a fact that some of the costs are going up. In terms of how much of it we can pass on to the on-site customer and so on is very much Depending on the details of the contract that we have negotiated with the specific customers, so I cannot make a general statement. But overall, there is pressure on us to be very diligent to make sure that we Stay on top of the cost for our projects and all that and make sure that they don't eat into our returns as you alluded to.

Operator

Our next question comes from Duffy Fischer with Barclays. Please go ahead.

Speaker 14

Yes, good morning. And you normalize for having Jazan for the full quarter and not changing the JV structure. What would like a normalized EBITDA run rate be for that segment?

Speaker 2

Well, To some extent, you can calculate it in the sense that For the Q1, you have 2 months of Jazan. So for the next quarter, you have 3 months of Jazan. And most of that stuff is Jazan. So you can kind of triangulate to them approximately You come up with the number you are looking for.

Speaker 14

Okay. And then going forward, how variable Will that EBITDA number be is there seasonality in it? Are there going to be lumpy quarters where you've got turnarounds and stuff like that? Or will it be in a very tight range Can you kind of just print the same number quarter over quarter until you move on from Phase 1?

Speaker 2

I expect that number to be pretty stable because it's basically a facility fee. Now I don't expect The change significantly and our maintenance cost shouldn't change that significant.

Speaker 14

Terrific. Thanks guys.

Speaker 2

Thank you.

Operator

We'll go ahead and move on to our next question from Vincent Andrews with Morgan Stanley. Please go ahead.

Speaker 9

Thank you. Good morning, everyone.

Speaker 2

Hey, good morning.

Speaker 9

Thank you. Safi, I'm reading about there's about $9,000,000 Then infrastructure grants in the U. S. That are going to come out, is it fair to assume that you'll be positioning the company to get some And what order of magnitude do you think that could be?

Speaker 2

I have no idea because it depends on what gets allocated, how much of that will be for hydrogen, where the locations will be, what would be the criteria? I mean, we are These projects, as you know, there's sometimes a lot of strings attached that some of it might not be acceptable to us and all of that. So It is very, very difficult to project at this stage.

Speaker 11

Okay.

Speaker 2

Because they have just We have just started. We obviously are engaged with the Department of Energy because we have some real hydrogen projects. It's not theoretical, but I have really no visibility into what that number could be or should be.

Speaker 9

Okay. And just as a follow-up, there was a comment in the prepared remarks about America's hydrogen Still being below pre COVID levels, do you have a rough approximation of how below pre COVID levels you are?

Speaker 2

Something in the order of magnitude of about 5%, something like that. Doctor. Serhrant, you want to add to that?

Speaker 5

Yes, it is safe. It's around 5% to 10% from about 2 years ago.

Speaker 2

Thank you.

Speaker 9

Thank you. Thank you very much.

Speaker 2

Okay.

Operator

And we'll move on to Bob Koort with Goldman Sachs. Please go ahead. And Bob, are you on

Speaker 9

mute?

Operator

Okay. Due to no response, we will move on to our next question from Mark Banti with Cowen. Please go ahead.

Speaker 15

Hey, thank you. Good morning.

Speaker 2

Hi. The

Speaker 15

question came up earlier hey, Seifi. The question came up earlier about Annualizing the EPS and getting $10 but if I try to take out all the one time Jazan and the Recurring contribution of Jazan, it sort of looks like to me that the second half EPS implied in the guidance is up about 15% to 20% from the first half just in the underlying business, which seems like a big ramp. I know there's some favorable seasonality in there and you've got some Pricing initiatives to recover some of the energy costs. But could you talk to maybe The components of that improvement, how much is seasonality? What's the anticipated in terms of energy recovery?

Speaker 15

Those sorts of things. I'm curious for some more color.

Speaker 2

Sure. I mean, there is 2 guidelines. Obviously, we go through all of this thing before we give you guidance. And Because of what you said, that's why we didn't change our guidance for the year. But number 1, we have you know the results for Q1, we have given you guidance for the Q2, so you can add it up and you get to what we expect to make in the first half.

Speaker 2

Usually from a seasonality point of view, approximately, if you take all of the years, We make about 47%, 48% of our profit during the first half And 52% to 53% of it during the second half. So that is the seasonality kind of a thing that you can take a look at. And then the other thing is that we do expect that we will get ahead of this energy cost in Europe a little bit, And therefore recover some of that. And therefore, the performance of our European sector will be better. When you look at this quarter, actually the performance of our business in Asia and in the United States were very good.

Speaker 2

It's just that Europe that held our results. So if you put the combination of the seasonality and the recovery in Europe, then we have a reasonable chance of doing the Guidance that we have given you.

Speaker 15

Okay. That's all I had. Thank you so much.

Speaker 2

Well, thank you very much.

Operator

We'll go ahead and take our next question from Laurence Alexander with Jefferies. Please go ahead.

Speaker 8

Good morning. In your European on-site business, are you receiving any kind of performance bonuses for running at higher Operating rates and helping customers be more energy efficient given the high energy electricity prices that they're facing?

Speaker 2

Are obviously paying for the higher energy costs. We are not receiving any special Compensation or anything like that. They are just paying for the additional energy costs and we get our C PERA contract. Thank you. Thank you.

Operator

And we have no further questions. With that, that does conclude our question and answer session. I would now like to turn back over to our presenters for any additional or closing remarks.

Speaker 2

Well, thank you very much everybody for participating in our call. We appreciate your Attention and your good questions. And we wish you Good health and success for the balance of the quarter and look forward to talking to you next quarter. Thank you again.

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Earnings Conference Call
Air Products and Chemicals Q1 2022
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